Working Paper: NBER ID: w21436
Authors: Carlos A. Vegh; Guillermo Vuletin
Abstract: We provide a novel explanation for the flypaper effect based on insurance arguments. In our model, the flypaper effect arises due to the differential response of precautionary savings to private income or fiscal transfers shocks in an uncertain world with incomplete markets. The model generates two testable implications: (i) the flypaper effect is a decreasing function of the correlation between fiscal transfers and private income, and (ii) such relationship is stronger the higher is the volatility of fiscal transfers and/or private income. An empirical analysis of Argentinean provinces for the period 1963-2006 finds strong support for the model's implications.
Keywords: flypaper effect; fiscal transfers; private income; precautionary savings; Argentina
JEL Codes: E21; E62; H62; H77
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Fiscal Transfers (H87) | Government Spending (H59) |
| Private Income (D31) | Government Spending (H59) |
| Correlation between Fiscal Transfers and Private Income (H39) | Flypaper Effect (H30) |
| Volatility of Total Income (E25) | Precautionary Savings (D14) |
| Fiscal Transfers (H87) | Precautionary Savings (D14) |
| Private Income (D31) | Precautionary Savings (D14) |